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Citing compliance costs, Community Shores Bank to deregister shares with SEC

BY Sunday, November 12, 2017 03:55pm

MUSKEGON — Citing the high cost of complying with public reporting requirements, Community Shores Bank Corp. plans to deregister its shares with federal securities regulators.

The Muskegon-based community bank, which has operated as a public company since forming in 1998, will file papers toward the end of the year with the U.S. Securities and Exchange Commission to deregister. The deregistration would take effect within 90 days.

According to a recent filing, the accounting, legal and administrative costs of “preparing and filing periodic reports and other filings with the Securities Exchange Commission have become excessive in comparison to the company’s size” and outweigh “any discernable benefit to the company or its shareholders.”

“It’s a matter of practicality and cost versus benefit,” President and CEO Heather Brolick told MiBiz. “You’re spending a lot of money for the cost of that requirement and not getting a lot of benefit.”

The time executives devote to public reporting obligations also “unnecessarily detracts from time that could be concentrated on the company’s business,” according to the recent SEC filing.

Community Shores Bank has three offices in Muskegon County and one in Grand Haven in neighboring Ottawa County. At the end of the third quarter, the bank had assets of $190.7 million and $170.4 million in deposits, according to a quarterly financial report to the FDIC.

The corporation’s shares are lightly traded on the OTC Pink Market under the ticker symbol CSHB. The average daily trading volume of late is fewer than 600 shares, according to Yahoofinance.com.

Many small banks and corporations opted to deregister their shares following passage of the federal JOBS Act in 2012. The law allows banks with fewer than 1,200 shareholders to get out from under the cost of filing reports with the SEC.

Community Shores has fewer than 500 shareholders, Brolick said. Community Shores will continue to trade on the OTC Pink Market “so long as market makers demonstrate an interest in trading in the company’s common stock,” according to the recent SEC filing. The corporation will still file the required quarterly financial reports with banking regulators and intends to provide unaudited financial information on its website.

Directors at Community Shores decided to deregister shares given their light trading volume and the six-figure cost of preparing and filing reports with the SEC, Brolick said. Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 in the wake of the 2008 financial crisis raised reporting requirements for publicly-traded banks and dramatically increased Community Shores’ compliance costs, she said.

“Strategically, you have to question, ‘Why am I doing this?’” Brolick said. “It’s a change in how we think we should do business.”

Brolick said her own research found that about 80 banks used the JOBS Act to deregister their shares and cut regulatory compliance costs. All of them had assets ranging between $175 million and $250 million.

Since the SEC reporting requirements are the same for small and large banks, costs hit smaller community banks the hardest, said Phil Torrence, an attorney in Kalamazoo and co-leader of the financial institutions practices for Honigman Miller Schwartz and Cohn LLP.

For small publicly-held banks that are lightly traded, deregistration makes sense, Torrence said.

“If you don’t have a lot of volume and are not very active in terms of your shares being traded, and if you’re not using it for capital-raising purposes, and you’re not using your stock for acquisitions, then it really is a substantial cost,” Torrence said. “Between legal and accounting, it’s really expensive just to be a reporting company.”

Local banks that deregistered their shares following adoption of the JOBS Act included Grand River Commerce Inc. and St. Joseph-based Edgewater Bancorp Inc. 

Grand River Commerce, the parent company of Grand River Bank in Grandville with current total assets of $217.1 million, deregistered its shares in 2012, soon after the law went into effect. At the time, the bank had assets of $79.6 million.

Edgewater Bancorp deregistered its common shares last spring, saying the move would “reduce the substantial legal, accounting and other expenses associated with reporting compliance and make those savings available for continued operation of the business.” 

Edgewater expects the savings from deregistering shares to exceed $100,000 annually, according to President and CEO .

“That is a significant amount for an organization of our size,” he said.

Edgewater Bank, with five offices in the St. Joseph area, had assets of $157.6 million as of Sept. 30, according to its quarterly financial report to the FDIC. In 2016, the bank recorded net income of $450,000. Through the first three quarters of 2017, the bank’s net income totaled $467,000. 

Beyond the cost savings, deregistering the bank’s shares allowed senior management to spend more time on business development, Dyer said.

“We have reallocated our time,” he said. “My job is to spend more time in front of clients, not spend more time with required SEC reports.” 

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